Residential Property Investment – Should you opt for a limited company?

Many property investors and associated professionals will already be aware of the governments ambition to reduce the number of private BTL landlords in the market in favour of larger, institutional investors. Whilst professionalising investors in the market could have positive effects for tenants (who could benefit from better services and more responsible landlords), it still remains a drastic intervention in the market that will effect many.

One of the biggest impacts arises from new taxation rules affecting residential property investment. In particular, buy to let landlords will now no longer be able to deduct the full cost of their mortgage interest payments from their tax bill. The amount that can be deducted will be reduced gradually until 2020, leaving private landlords with a 20% flat rate tax relief, even if, as many are, the landlord is a higher rate taxpayer. Since interest costs will no longer be deducted for tax purposes, there will be many investors who are currently higher rate tax payers who will indeed see their tax bill rise substantially.

Limited companies will not be affected by this change, and some landlords are setting up companies to mitigate the new tax regime. However, HMRC treats the transfer of ownership of a property as a sale and is subject to capital gains tax, which means that investors should carefully consider such a step. Capital gains tax accrues if the property has risen in value since the original purchase and stands at 18% for a basic rate tax payer and 28% for a higher rate. Selling a property into a limited company triggers stamp duty, including a surcharge on second homes and BTL property (introduced in April 2016). On top of this, there are more obligations and cost in terms of timely filing of accounts and annual confirmation statement.

The new tax relief regime is going to make the BTL sector less profitable for a number of private landlords and most will see their tax bill increase dramatically. Some investors with high mortgage interest payments compared to the rental income the property generates will see their profits completely eroded by mortgage costs and taxes.

It is important therefore that investors consult a good accountant as soon as possible to consider how they will be impacted. Here at Key Commercial Finance we can assist in looking at refinance options if the property is to be transferred into a limited company.